Keeping up with the mortgages

Improving economy helps push delinquencies lower

CHICAGO (CBS.MW) -- The improving U.S. economy gave overburdened homeowners a reprieve in the third quarter, as the number of Americans falling behind on their mortgages fell to its lowest level in three years.

The Mortgage Bankers Association said that mortgage delinquencies -- those loans more than 30 days past due but not yet in foreclosure --were running at a seasonally adjusted 4.28 percent in the third quarter, down from 4.62 percent at the end of June -- the largest quarterly decline in the rate since 1990.

"The third quarter represented the beginning signs of a strengthening economy and that makes the large drop in delinquencies consistent with what we've seen in other recoveries," said Doug Duncan, chief economist for the MBA.

Although mortgage rates crept higher in the third quarter after touching 45-year lows in June, job creation finally picked up as well, underpinning the financial situation for many homeowners who had been on the edge.

The U.S. economy added just over 100,000 jobs in the third quarter after shedding approximately 180,000 jobs in the second quarter. That turnaround helped push delinquency rates lower for all categories of mortgages, even the riskiest subprime loans.

And, Duncan pointed out, with job growth continuing at an even better pace in October and November, continued in improvement in the delinquency rate can be expected for at least the next several quarters.

Not all the news from the MBA's quarterly survey, released Tuesday, was positive. The percentage of new loans entering the foreclosure process actually rose during the quarter, to 0.38 percent from 0.32 percent in the previous quarter, and up from 0.37 percent in the third quarter of 2002.

And for government-insured FHA mortgages, the rate of new loans entering foreclosure hit an all-time record -- 0.98 percent. That was up sharply from 0.81 percent a quarter before and also up from 0.81 percent in the second quarter of 2002.

Overall, the percentage of mortgages somewhere in the foreclosure process stayed the same in the third quarter at 1.12 percent. But 2.8 percent of all FHA loans were in foreclosure, up from 2.64 percent in the second quarter and from 2.44 in the year-ago period.

Although delinquency rates on FHA loans fell in the quarter, to 12.13 percent from 12.59 percent, they fell from a near-record pace.

The rise of subprime

The continuing troubles in the FHA program underscore an ongoing shift in the mortgage market: Traditionally the lender of first resort for creditworthy first-time homebuyers who had little in the way of a down payment, the FHA has instead become a repository for the riskiest pool of borrowers as conventional lenders, many offering subprime loan products, siphon off those potential customers.

Conventional lenders in the last decade have created a variety of loan alternatives, many offering low or no down-payment provisions that were once the exclusive province of the FHA. And the advent of the subprime market, in which lenders take on less creditworthy borrowers in exchange for higher mortgage rates, has also cut into the number of potential homeowners to FHA appeals.

The subprime market is still a relatively young one, so it's hard to assess its performance. On the limited data that the MBA has collected so far, subprime loans have not done much better than the FHA loans.

But the subprime category did show marked improvement in the third quarter, as delinquencies fell to 11.71 percent from 12.99 percent in the second quarter. Duncan cautions that because the survey sample is small, only about 1.5 million loans, it is difficult to read too much into one quarter's numbers.

Whether subprime or not, lenders have reached out to more Americans than ever in the last few years, turning many who in the past might have been denied a mortgage into homeowners, a record rate of 68 percent.

But in many ways it is too early to judge the effect all that lending to traditionally underserved constituents. For one thing, so many loans were made in the last year, with rates so low, that they have not had time to "season," as they say in the mortgage business, meaning it is hard to predict just how well borrowers will repay over time.

One thing is for certain though, Duncan believes: Delinquency rates are going to look higher overall than they have in the past.

"The expansion of the nonprime portfolio ... means on average there should be higher delinquencies and foreclosures than we would have seen a decade ago," he said.

Steve
Kerch

Steve Kerch is assistant managing editor of MarketWatch in Chicago. Follow him on Twitter @PFBoss.

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